Retrospective amendment to service tax- Renting of immovable property provided in budget 2010

Finance Bill 2010 has made an amendment in the definition of the taxable service ‘Renting of immovable property’ [section 65 (105) (zzzz)] to provide explicitly that the activity of ‘renting’ itself is a taxable service. This change is being given retrospective effect from 01.06.2007.

This service was introduced in 2007 with a view to tax the commercial use of immovable property hired on rent. The tax on rent paid is available as input credit if the commercial activity involves provision of taxable service or manufacture of dutiable goods. However, the Hon’ble High court of Delhi in its order dated 18.04.2009 in the case of Home Solutions Retail India Ltd. & Others vs. UOI has struck down this levy by observing that the renting of immovable property for use in the course of furtherance of business or commerce does not involve any value addition and therefore, cannot be regarded as service. Apart from the revenue loss caused to the exchequer, the judgement has placed the landlords in a very precarious situation. In view of this judgement, the commercial tenants have stopped them reimbursing the tax element. However, the landlords are receiving regular demand notices from the department issued to protect government’s revenue for the interim period. In order to clarify the legislative intent and also bring in certainty in tax liability the relevant definition of taxable service is being amended to clarify that the activity of renting of immovable property per se would also constitute a taxable service under the relevant clause. This amendment is being given retrospective effect from 01.06.2007.

The question of determination of the validity of this service is pending before the Hon’ble Supreme Court and the Hon’ble SC had rejected the prey of the department to vacate the stay. However the above proposed amendment has nullified the decision of the Hon’ble Delhi Court and has also rendered the determination of question of validity by the Hon’ble SC to  just an academic exercise. This is one type of parliamentary conflict with the judiciary and therefore the decision of the SC will now hold no water after this amendment and the  landlords will be loaded with huge liability of Service tax, interest and penalty which , all together, near 3 times of the service tax payable. The landlord will have to pay service tax w.e.f. 01-05-07 even if they have not collected it from the tenant under the protection of judiciary. For those landlords where the tenancy is still continuing, they may try to enforce the collection of service tax from the existing tenant. However, what will happen to those landlords where the tenants have already vacated the premises and may not be traceable now. Can we expect some sort of administrative relief in this case ? or will the validity of this service be again agitated before the court of law to gain relief from retrospective amendment?. The question is wide open and the learned readers are requested to express their view on this amendment).

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